Long-Term Portfolio Simulation - For XVA, Limits, Liquidity and Regulatory Capital

Long-Term Portfolio Simulation book

In today’s regulatory environment, it is becoming increasingly important to answer the question of why a particular model or calibration method is being used by something better than “we have always done it this way” or “this is consistent with market practice”. Even when the model is indeed part of market practice it has to be justified on its merits and its limitations must be clearly understood.


Published in September 2014, “Long-Term Portfolio Simulation - For XVA, Limits, Liquidity and Regulatory Capital” provides a comprehensive step-by-step guide to every aspect of constructing and using a long-term portfolio simulation models. A comprehensive description of advanced techniques for model construction and calibration includes application examples to different asset classes. A table of contents lists topics covered in the book:


  • Fair Value CVA
  • FVA and Collateral Optimisation
  • PFE and Limits
  • Liquidity
  • Default Capital Charge
  • CVA Capital Charge
  • KVA

Correlation and Cointegration

  • Classical Correlation
  • Estimation of Correlation
  • Principal Component Analysis (PCA)
  • Incremental Correlation
  • Correlation Skew
  • Dependence Mapping
  • Cointegration

Model Set-Up and Simulation

  • Path Consistency
  • Joint Measure
  • Calibration
  • Primary Model
  • Incremental Models
  • Trade-Specific Models
  • External Models
  • Margin Period of Risk Model

Backward Induction

  • Cashflow Decomposition and Compression
  • American Monte Carlo (AMC)
  • Dimension Reduction for AMC
  • Least Squares AMC
  • Smoothing Spline AMC
  • AMC in Multiple Dimensions
  • Quantile Mapped AMC
  • AMC for the Exercise Boundary
  • Path Injection AMC
  • Real-World AMC

Interest Rates

  • One-Factor Joint-Measure Model
  • Local Price of Risk
  • Estimation of the Real-World Drift
  • Volatility Skew
  • Mean-Reversion Skew
  • Near-Zero Rates
  • Two-Factor Short-Rate Models
  • Libor Market Model (LMM)

FX and Cross-Currency

  • One-Factor Model
  • Long-Dated FX
  • Interest Rate Mean Reversion and FX
  • Drift Using Interest Rate Parity (IRP)
  • Drift Using Purchasing Power Parity (PPP)

Credit Spread

  • Reduced-Form Framework
  • One-Factor Joint-Measure Model
  • Credit Curve
  • Estimation of the Real-World Drift
  • Volatility Skew
  • Mean-Reversion Skew
  • Spread-Return Models

Wrong-Way Risk

  • General Wrong-Way Risk
  • Systemic Wrong-Way Risk

To download the free chapter “Backward Induction”, find latest reviews or order the book, please visit Risk Books page